5 Ways Unit Amenities Boost Revenue, Even in This Recession
by Donald Davidoff | September 23, 2020
More than six months into the health and economic crisis, most operators and revenue managers have been focusing on finding ways to defend rents. While this energy and time spent to combat declines as high as (in some urban high-rise even higher than) 10-15% are well worth it, we thought we'd take some time and talk about a place where almost every operator could gain revenue, and gain it quickly.
What could possibly be an "easy" source of rent gain in the middle of recession while heading into the slow season? It's a renewed focus on unit amenities, an area of pricing that most of us will acknowledge does not get the same attention as base rents. In 2018, with the winds of growth in the industry's sails, we reported seven common mistakes with amenities. Below are five "Amenity Fails" that everyone should focus on in today's market.
Fail #1: Amenity “holes”
"Holes" are missing amenities. For example, if units 105 and 305 both have a pool view assigned to them, but unit 205 doesn't, then that's a "hole." The reference comes from a method and application we've created that makes it easy to look at amenities by floor and stack. In such a grid, the lack of a pool view in unit 205 looks like a clear "hole" when the visualization clearly shows the amenity assigned to units 105 and 305.
Amenity holes are by far the most common error we find and also the easiest to correct. Whether the opportunity comes from merely "fumble finger" errors persisting from the community's initial configuration or whether they occur from an operator's intentional action to reduce rent for that unit sometime in the past, this is a quick and simple way to increase revenue with no risk.
Fail #2: Missed amenities
Do any of your buildings have corner units that have not been amenitized? Despite the advent of streaming, do any of your residents still value a southern exposure that you have not amenitized? Are there any floorplans or locations that always lease more quickly than others?
If you answered yes to any of the above, then you have missing amenities that can quickly be added and thus increase your potential rent.
Fail #3: Over-bundling
This example is rarer, but the ramifications are large since over-priced units tend to build up more vacancy loss. Recessions amplify the loss, as prospects tend to be more price-sensitive, and available supply grows. We can no longer get away with leasing an over-priced unit because of low supply or just waiting until the "right" person comes along.
Over-bundling happens any time multiple related amenities pile up. It's particularly common on top floors of high-rise buildings where floor and view premiums that individually make sense combine to price the unit out of the market. However, we've seen it in garden communities when multiple view renovation premiums pile up, to name two examples.
Fail #4: Inaccurate (or worse, missing) square footage premiums
Because incorrect square footage premiums apply to so many units, this may be the largest opportunity in total dollar value terms. We frequently see two floorplans within a unit type (or in YieldStar lingo, two unit types within a floorplan) but different square footages priced identically ($0 floorplan offset in LRO language; $0 base rent adjustment in YieldStar terminology).
We also see scenarios where the incremental square footage for a larger home rents for 50 cents for each "extra" square foot while the base homes are leasing for $1.75 PSF. This is much lower than what an incremental square foot is worth. Worse, though less frequent, is the same scenario where the larger home rents for $2,00 PSF or more. These over-priced offsets are particularly critical in a recession as the likely increased vacancy loss will be even worse.
Fail #5: Arbitrary adjustments masquerading as amenities
It's very tempting to reduce individual units' rents arbitrarily during a downturn. And as we discussed in our recent webinar on revenue management in a downturn, there are some instances during a recession where this may be an appropriate tactic. However, we highly recommend against doing this through unit amenities. Too often, the amenity stays in place long past the time that the price change was appropriate.
Unit amenities are a time-consuming challenge for multifamily operators. But, as we have discussed extensively this year, they represent the lowest-hanging fruit for revenue managers. The good news is that help is at hand, with D2 Amenity Analyzer, a new application designed to free up lost revenue, eradicate the "fails" listed above.